India's weight in the MSCI Emerging market index is expected to rise in the coming years and the equity market will attract more foreign fund inflows going ahead, says a Morgan Stanley report.
While India ranks among the top three in the emerging market basket in terms of GDP, it barely makes it into the top 15 in terms of index weight.
"We are arguing that as India gains GDP versus the rest of the world, its index weight will rise," Morgan Stanley Investment Management said in a research note.
"As India index weight rises, it will probably attract more non-long-term money, or what we can loosely call 'tourist flows'," the report authored by Ridham Desai and Sheela Rathi said.
According to the report, part of this underrepresentation problem is India's smaller free float -- the portion of equity which is in the hands of public shareholders.
"The gap between index weight and GDP rank is likely to keep closing, while India's GDP weight is also gaining share.
Indeed, India's foreign free float should also rise as new securities get listed and enter the index," the report added.
According to Morgan Stanley domestic institutions are likely to get bigger in size.
"In our view, India is entering an equity saving ascent that is both cyclical and structural, as households shift out of physical assets and toward financial assets," it said.
Morgan Stanley expects equity saving to equate to 1.4 per cent of GDP by financial year 2026 (double from the current 0.7 per cent), "implying a cumulative equity saving expansion of USD 420 billion over the next decade".
According to Morgan Stanley, there will a significant shift towards accumulating savings in financial assets, especially in equities.